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From The Public Interest No. 158 (Winter 2005) pp. 96-110. 2005 by
National Affairs, Inc. This article is intended for individual use only.
T IS certainly a memorable
image: New York City mayor Abe Beame standing before
the Wailing Wall in Jerusalem and leaving a plaintive,
one-word noteHELP. At that time, 30 years ago, the
Big Apple needed all the help it could get. It was in the
midst of a financial crisis the likes of which had rarely
been seen in any American metropolis before. At that
point, not even a spectacularly effective mayor could have
pulled the city back from the brink, so all the spectacularly ineffective Beame could hope for was an answer to
his prayer. He didnt get it.
Thirty years later, much has changed for the better in
New York. But since the April 1975 fiscal crisis the worlds
financial capital has continued to lurch from one fiscal crunch
to another, up to the present day. Sometimes the symptoms
have been more obvious, but even when it has appeared
healthy the citys disease has always been lurking there, just
under the skin, waiting to flare up at any moment.
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had been resorting to increasingly risky methods for financing its obligations. The Arab oil embargo of 1973
was enough to push Gotham over the edge.
That embargo and the recession it sparked caused an
overall worsening of the citys economy, and thus its tax
base. At the same time, it led to a general tightening in
the broader market for municipal bonds. The bean-counters
did the best they could to keep the situation under control, but by the spring of 1975 the game was up. The city
could not find any takers for yet another seasonal offering
of tax anticipation notes (a type of short-term bond designed to tide the city over until its next round of tax
revenues starts pouring in). Beame was forced to plead
publicly for investors to buy the notes. When that didnt
work, Gotham was officially flat broke, and there was a
danger that the city would simply default on its debts.
Something had to be done.
But what? The city had no hope of growing its way out
of the hole. Burdened with backbreaking taxes, the citys
economy had been in free-fall since 1969. Between that
year and 1977, an astounding 570,000 private-sector jobs
disappeared. The only real growth industry was governmenteven as its balance sheet was spiraling into oblivion,
its work force was expanding by 100,000. Meanwhile,
getting labor concessions proved nearly impossible. The
unions would eventually make limited concessions, but
for a time it looked like they would sink the city with a
general strike and mob violence. When Beame called for
city workers to forgo a 6 percent pay increase scheduled
for July 1, 1975, the citys Municipal Labor Coalition
responded by bringing tens of thousands of protestors into
the narrow canyons of lower Manhattan in a raucous protest against the First National Bank (later CitiBank), which
union leaders and liberal politicians had declared the
number one enemy because, as a major bondholder, it
had expressed doubts about the citys solvency. Beames
program of limited layoffs sparked a wave of sick-outs,
protest strikes, and walkouts by workers performing essential services such as sanitation. City Hall itself came
under siege as the pink slips started issuing forth, and
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laid-off cops blockaded the nearby Brooklyn Bridge, hurling beer cans at their still uniformed brethren and letting
the air out of tires to create a giant traffic jam.
The more radical labor leaders wanted a general strike,
but it quickly became apparent that the federal government was not going to offer a bailout. This forced the
unions to confront a frightening possibility: With no federal help forthcoming (remember Gerald Fords famous
Drop Dead speech in the fall of 1975), the city could
go bankrupt. And if that happened, City Hall would be in
a position to scratch all the generous labor contracts and
start over. This threat ultimately led the union leadership
to rethink their position.
How not to fix a city budget
The citys fiscal rescue was financed by the Municipal
Assistance Corporation (MAC), created by governor Hugh
L. Carey. It would prove only a partial cure: Statutory
reforms achieved fiscal transparency and improved financial planning, but left the citys propensity for excessive
spending largely unchanged. MAC was a state entity handed
a dedicated tax revenue stream to allow it to convert the
citys short-term debt into more secure long-term bonds.
Financially, MAC, chaired by Lazard Freres banker Felix
Rohatyn, was a success. But ironically, that very success
reduced the pressure to address the citys underlying problemthat it was spending beyond its means. It was as if
a high-living homebuyer had, among his spending excesses,
purchased a house that was too expensive for him given
his income. But rather than scaling down his spending, he
instead went in search of an accommodating bank that
would allow him to stretch out the refinancing of his
mortgage on slightly more favorable terms.
MAC also had a second, more subtle irony. It ultimately provided a convenient opportunity for the unions
to win easy political points without making significant
concessions. They could do this by agreeing to let the
city pension plans purchase MAC bonds. They had initially resisted the idea when they were first dragged everso-reluctantly to the negotiating table. However, they even-
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of some services. He was particularly successful in contracting out social service programs to nonprofit agencies.
Facing a cash shortfall and desperate to reduce costs lest
the city be taken over by the financial control board,
Giuliani made welfare reduction a top budgetary priority.
Trumpeting the theme of work, he split the labor-liberal
coalition by enlisting the public-sector middle class in
support of welfare reform. The strategy worked, and in
one of his signal achievements Giuliani began to sharply
reduce the rolls even before federal welfare reform legislation was enacted.
But in doing so, he also perpetuated the unsustainable
costs of the citys public-sector work force. His last financial plan, adopted just two months before September
11, 2001, contained what amounted to a $2 billion operating deficit covered with surplus funds from prior years.
Giuliani effectively mortgaged a portion of the citys future economic growth to make good on promises to city
workers.
Whoever succeeded Giuliani was destined to inherit an
unbalanced budget; the World Trade Center attack simply
blew the hole about 50 percent bigger. Michael Bloomberg
has relied heavily on tax increases and borrowing to close
a budget gap that reached $6 billion early in his tenure.
His unwillingness to challenge New Yorks distributional
politics and entitlement culture virtually ensures a continued long-term decline in New Yorks relative economic
growth. Giulianis achievements notwithstanding, it still
seems like city leaders are acting as if they have learned
nothing from the experience of 1975.
One-party dangers
At a remove of three decades, the fiscal crisis can
seem like nothing but a distant tragedy. And yet if one
looks at the current trials and tribulations of a certain
large, West-coast state, all of a sudden the lessons of the
New York debacle take on a new importance.
What are those lessons? First, its not the economy,
stupidits politics. Rereading the history of the Big
Apples fiscal crisis, one of the most striking aspects of
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the sad story is that the decline into chaos was more or
less gradual, starting back in the 1930s and only culminating 40 years later. This is an important point: Normal
economic cycles were not ultimately to blame for New
Yorks fiscal crisis, or for its recurring problems since
then. A particular economic eventthe oil embargomight
have been the straw that broke the camels back. But the
camel was already badly in need of a chiropractor. What
made the camel vulnerable was its long history of distributional public-sector politics that took the private sector
for granted. The motivation for such policies did not matterWagners grant of collective bargaining rights as a
calculated ploy to break Tammany was just as destructive
as Lindsays high-minded, but woefully misguided, effort
to solve racism by putting much of the citys AfricanAmerican community on to the dole, which in turn was
just as damaging as Beames lack of leadership in the
face of mounting budgetary danger.
It is worth considering New Yorks particular brand of
distributional politics. As Olsons generalized theory would
predict, the citys death spiral was made possible by the
fact that it was a largely affluent place to begin with, and
boasted a comparative advantage in several highly lucrative sectors, an advantage that would help mask the deleterious effects of redistributionist policies at the start by
attracting similar businesses despite the tax rates. All a
politician needed was to create a steeply progressive income tax and he would be good to go.
A lack of political competition is crucial, too. Despite
the election of three at least nominally Republican mayors
in the last 40 years, the Republican party has virtually
ceased to exist as an organized political force outside the
smallest borough, Staten Island. The citys 1992 termlimit law brought a predictable termination date to the
Giuliani era (a period of relative budgetary restraint), but
has made no difference in the overwhelmingly Democratic
makeup of the city council. This means that even the
most irresponsible politicians have a high likelihood of
retaining their seats, since as long as they squeak through
a party primary they are unlikely to face a serious challenge in the general election.
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